1. INTRODUCTION:

Indian Pharmaceutical industry supplies more than fifty percent of the global demand for various vaccines. In the global pharmaceuticals sector, India is a significant and rising player. India is the world's largest supplier of generic medications. The companies in Indian pharmaceutical industry are fairly doing well, hence promoters and investors in this industry need to know what is the fair market value of firms and factors affecting for market value of these firms. The research study on financial performance of companies undertaken by Yeh and Hoshino¹ studied twenty Taiwanese corporations during 1987-1992 and found that profitability ratios are the determinants for firm value of corporations. Nissim and Penman² found that financial statement analysis should be conducted to focus on the performance analysis which determine the value of firm.

Jianxin³ found that giving rights to shareholders has reduced costs and increased the value of firm. Joshua⁴ investigated that whether leverage ratios of Ghana Stock Exchange listed companies determine capital structure and found that there is positive relation between the ratio of short-term debt to total assets and return on equity, between the ratio of total debt to total assets and ROE. Salim and Yadav⁵shown that there is a negative relationship between firm value and short-term debt, long-term debt, total debt and a positive relationship exists between the growth and performance. Tobin’s Q report explains that there is significantly positive relationship between the variables. Gupta and Gupta⁶ assessed the effect of Indian cement companies' capital structure on the value of firm using correlation, regression analysis and found that the there a significant negative relationship between EPS and debt equity ratio. Chadha and Sharma⁷reported that financial leverage does not impact firm’s financial performance like return on assets and market capitalisation. Divya and Purna⁸ opined that profitability, age, size, serviceability of debt and tax shield variables are the significant firm-level determinants of firm value. Rakesh⁹ studied the determinants of capital structure and reported that profitability, size, age, debt service capacity growth and tax shield variables are the significant firm-level determinants of capital structure. Anindita and Ahindra¹⁰found that while the firms’ age, asset turnover ratio, liquidity and firms’ size to be significant determinants of capital structure and profitability, debt service capacity, sales growth, non-debt tax shield and tangibility ratio are insignificant determinants of capital structure for the Indian energy companies. Manjunatha and Gujjar¹¹ analyzed and found that net income of the organization is not enough to determine its efficiency unless profit margin, asset turnover, financial leverage is taken into consideration. Kavitha and Mohanraj¹² found that while capital structure is significantly related with cost of debt, size of the business, liquidity, profitability and value of asset and it is not significantly related with liquidity. Manjunatha et.al¹³ found that return on equity is better in creating positive shareholders value and found that return on sales, return on assets and assets turnover are positively correlated with return on equity. Praveen and Manjunatha¹⁴ calculated return on equity for software and training services companies in India using three factors DuPont model and five factors DuPont model and found that there is a significant relationship between ROE, asset turnover and profit margin. Manjunatha and Vikas¹⁵ found that there is a significant difference in the financing pattern and independent variables have inverse relationship with the financing pattern of selected pharmaceutical sectors in India. Rajeshkumar¹⁶ that working capital to total assets, working capital to operating expenditure, retained earnings to total assets, logarithm of sales and logarithm of PBIT by total assets emerge as major determinants of the financial performance of telecommunication industry in India.

While many studies have been conducted on determinants of value of firm in the western countries, there are a few studies in the Indian context. Studies by Rakesh⁹, Anindita and Ahindra¹⁰ have generally supported the determinants of the value of firm in India. There is no robust conclusive evidence that whether we can use particular variables to know the determinants of value of firm in India and further Kavitha and Mohanraj ¹² suggested using large sample for longer span of time to ascertain the relationship between value of firm and liquidity, leverage, profitability and efficiency ratios. Therefore, this study is undertaken to ascertain the determinants value of pharmaceutical industry in India.

2. RESEARCH DESIGN

2.1 Objective:

The literature review directs to set the below objective for present study.

· To ascertain the determinants of the value for pharmaceutical industry in India.

2.2 Data and Sample:

We use the financial data of one hundred and forty-one pharmaceutical companies which are listed in the Indian stock exchanges. The company’s selection criteria are: a) the companies selected should have been listed and traded in Indian stock exchanges and b) annual reports and financial statements should be available for the years 1999-2000 to 2017-2018. The total number of companies included in this study, using the above criteria is one hundred and forty-one. The value of firm is measured using three dependent variables: (a) total market value of firm (TMVF); (b) market capitalization and (c) market value of firm and the eleven independent variables used are: (1) long term debt to equity; (2) total debt-equity ratio; (3) total debt (excluding current liabilities) to debt + equity; (4) total debt (excluding current liabilities) to total assets ratio; (5) capital gearing ratio; (6) proprietary ratio; (7) leverage ratio; (8) long term debt to total capitalisation; (9) long term debt to total asset; (10) short term debt to total debt and (11) current liabilities to total assets are computed from financial statements of sample pharmaceutical companies for the study from 2000 to 2018 for each company in different industry and by aggregating them industry wise.

Note: TMVF is computed by taking the market capitalization and adding preference capital and the total debt; market capitalisation is computed as the product of the market price of shares and the number of equity shares and market value of firm is computed by taking the market capitalization and adding the preference share capital and long-term debt.

2.3 Tools of Analysis:

There are numerous factors both qualitative and quantitative, including the subjective judgment of financial managers which conjointly determine the value of firm. The main determinants of the value of firm are many. In this study we use eleven different financial ratios to ascertain how these ratios influence the value of firm of the pharmaceutical industry. We use financial statement analysis tools and regression model for the paper. Three ratios representing value of firm are dependent variables and eleven ratios are taken as independent variables. The following regression equations are designed to test the relationship and significance.

TMVF = α_i + β_1* variable +e_i…1

Market Capitalization = α_i + β_1* variable +e_i…2

Market value of firm. = α_i + β_1* variable +e_i…3

We use regression analysis by taking one independent variable and one dependent variable at a time and present results of the regression co-efficients and their corresponding probability values (p-values). We use eleven independent variables, three dependent variables which results in thirty-three regression lines.

3. RESULTS AND ANALYSIS:

The regression result reported in the Table 1 shows the determinants of TMVF, market capitalisation and market value of firm in pharmaceutical industry. The regression result reported in the table shows the determinants of TMVF, market capitalization and market value of firm. Of the eleven independent variables analyzed, ten exhibit positive association with TMVF and one exhibit negative association. A positive association indicates that the independent variable has a direct relationship with TMVF which means as the independent variable increases, TMVF also increases. Total debt-equity ratio, long term debt to total Asset etc. exhibit a positive association with TMVF. A negative association indicates that the independent variable has an indirect relationship with TMVF which means as the independent variable increases, TMVF decreases. Capital gearing ratio exhibit a negative association with TMVF. Of the eleven independent variables analyzed, none exhibit a statistically significant association with TMVF and all eleven exhibit statistically insignificant association. The independent variables having statistically significant association with TMVF are the determinants of firm value and those independent variables having statistically insignificant association with TMVF are not the determinants of firm value.

Table 1 Determinant of Total Market Value of Firm, Market Capitalisation and Market Value of Firm for Pharmaceutical Industry

	i		Ii		Iii
Sl No.	a	b	a	B	a	B
1	0.00	0.46	0.00	0.75	0.00	0.75
2	0.00	0.74	0.00	0.66	0.00	0.66
3	0.00	0.23	0.00	0.96	0.00	0.96
4	0.00	0.83	0.00	0.97	0.00	0.97
5	-0.09	0.18	0.00	0.0011*	0.00	0.0011*
6	0.00	0.44	0.00	0.25	0.00	0.25
7	0.00	0.52	0.00	0.52	0.00	0.52
8	0.00	0.90	0.00	0.94	0.00	0.94
9	0.00	0.68	0.00	0.96	0.00	0.96
10	0.00	0.19	0.00	0.40	0.00	0.40
11	0.00	0.85	0.00	0.95	0.00	0.95
12	10	11	11	10	11	10
13	1	0	0	1	0	1
14		10		10		10
15		1		0		0
16		0		1		1
17		0		0		0

Source: Computed by the researcher using the ratios and fitting the simple linear regression.

Note 1: First row of the Table 1 serial number ‘a to c’ represents dependent variables which are explained under the heading ‘data and sample’.

Note 2: First column of the Table 1 serial number 1 to 11 represents independent variables

Note 3: Second and third column of the Table1 serial number i and ii indicates co-efficient and p values respectively. Same explanation holds good for column fourth to ninth.

Note 4: Twelfth row of the table indicates the number of positive coefficients (N+ve/ P>0.05).

Note 5: Thirteenth row of the table indicates the number of negative coefficients (N –ve/ P<0.05).

Note 6: Fourteenth row of the table indicates the number of positive coefficients and their statistical significance (N +ve, P>0.05).

Note 7: Fifteenth row of the table indicates the number of negative coefficients and not statistically significant (N-ve, P>0.05).

Note 8: Sixteenth row of the table indicates the number of independent variables having statistically significant association with dependent variable (N +ve, P>0.05).

Note 9: Seventieth row of the table indicates the number of independent variables which do not have statistically significant association with dependent variable (N -ve, P>0.05).

Note 10: The*mark in the p-value column denotes that the corresponding coefficients of the independent variables are statistically significant at 5% level of significance. N at the top of the table represents the number of observations taken for fitting the regression.

Of the eleven independent variables analyzed, all eleven-exhibit positive association with market capitalization and none exhibit negative association. Long term debt to equity, short term debt to total debt etc. exhibit a positive association with market capitalization. Of the eleven independent variables analyzed, one exhibit a statistically significant association with market capitalization and ten exhibit statistically insignificant association. The one independent variable having statistically significant association with market capitalization, exhibit positive association. Capital gearing ratio exhibit a statistically significant positive association with market capitalization.

Of the eleven independent variables analyzed, all eleven-exhibit positive association with market value of firm and none exhibit negative association. Total debt to debt + equity, long term debt to total capitalization etc. exhibit a positive association with market value of firm. Of the eleven independent variables analyzed, one exhibit a statistically significant association with market value of firm and ten exhibit statistically insignificant association. The one independent variable having statistically significant association with market value of firm, exhibit positive association. Capital gearing ratio exhibit a statistically significant positive association with market value of firm.

4. SUMMARY AND CONCLUSION:

This paper has attempted to test the determinants of TMV, market capitalisation and market value of firm in pharmaceutical industry in India. The results of the study show that independent variable viz Capital gearing ratio has a significant negative relationship with the total market value of firm and positive relationship with market capitalization and market value of firm. However, the value of the coefficients is very low and therefore, the predictability of this variable for the value of firm is very weak for pharmaceutical industry in India

5. IMPLICATIONS AND SCOPE FOR FURTHER RESEARCH:

The results of the study may be used by researchers to compare with other foreign pharmaceutical companies to understand the determinants of value of firm of the pharmaceutical industry. We have analysed only the listed companies and further studies can include unlisted companies. Further studies can be undertaken for company wise analysis and also bivariate, trivariate and multivariate regressions models may be designed for better understanding of the relationship and significance in pharmaceutical industry in India and western countries.

6. REFERENCES:

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Received on 16.06.2022 Modified on 28.06.2022

Asian Journal of Management. 2022;13(3):247-250.

DOI: 10.52711/2321-5763.2022.00043